Provident - Non money saving tip of the week !

Cumbrian_Male

jamesd wrote:

There are really two cases: the straight repayment and the refinance with additional lending. Here Provident seems to completely destroy its case if it pays the same commission to the agent in both cases. It's fine to reward the agent for collecting all of the money due and eliminating the future default risk, but that needs to be reduced to reflect the eliminated cost of collection for the agent and I don't know if it is reduced. But then there's the refinance and there the risk of default remains and exposure is actually higher (though offset by past regular repayments), so a far lower commission seems appropriate because the agent will be getting the increased return on the new loan.

Some commission to encourage early repayment and pay the agent for the costs involved does seem reasonable, but I can't see any reasoning that could justify it if the rates were the same for these two cases.

Without going into too much detail, an agents commission rate reflects the quality of their agency. The more customers who go into arrears the lower the rate of commission, this is to punish agents who over commit their customers.

For bulk payments of anything over 5x weekly rate they get half the standard commission rate. 5x to allow for monthly paid accounts.

However there isn't any distinction between a bulk payment being a genuine early settlement, or generated through refinance.

So there is a differential as they receive half what they would have if they collected it to term.

From a company point of view a settled account is a lost source of revenue, and a higher cost associated with recruiting another customer of unknown risk.

So in your view we should pay more to agents who eliminate the default risk by removing the income source, than the one who retains it?

Cumbrian_Male

jamesd wrote:

Given the high interest rates and fixed time periods - in months rather than amounts or percentages - I agree with the CC that the current rules provide too little rebate for this market. Particularly for that really finely tweaked just over a year loan term so two months instead of one can be taken.

There could be a cynical view that it is priced to take advantage of this, however this product term was 50 weeks back in the late 80's early 90's and has gradually moved out week by week to the current 55 weeks. It has been this rate since before the ESR 2004 regs came in. Last price increase was around 2003 IIRC.

As for fixed time periods, it is fixed cost to the customer. When the customer takes 3 or 4 years to pay their 55 week loan there is no additional charge to the customer. The company incurres additional costs as our loans run longer.

Do you suggest we adopt a different approach and start to charge additonal interest to those who have defaulted so those who settle early get a better deal?

We are based on transparency and fixed cost. No additional interest or bounced cheque charges.

Yes the reporting of account history to CRA's could well become a way for those who have a poor credit history to repair their rating and demonstrate financial stability.

It will probably lead to a lose of customers but if it means that Home Credit isn't villified as it is now then it can only be a good thing. It will mean we have to keep improving our selection and risk assessment techniques as more of the profitable customers move up to mainstream lenders, or that the costs of borrowing at this end of the market increases.

The next few years will interesting for the home credit market.

All views expressed are my own and not those of my employer.

jamesd

Cumbrian_Male wrote:

There could be a cynical view that it is priced to take advantage of this, however this product term was 50 weeks back in the late 80's early 90's and has gradually moved out week by week to the current 55 weeks. It has been this rate since before the ESR 2004 regs came in. Last price increase was around 2003 IIRC.

I apologise for being too cynical, though I'm sure you can understand why I expect a business to seek to maximise revenue.

Cumbrian_Male wrote:

As for fixed time periods, it is fixed cost to the customer. When the customer takes 3 or 4 years to pay their 55 week loan there is no additional charge to the customer. The company incurres additional costs as our loans run longer.

Do you suggest we adopt a different approach and start to charge additonal interest to those who have defaulted so those who settle early get a better deal?

I suggest that the rules appear to both prohibit lost potential profit recovery from early repayment and require a fair split of the saved costs between the company and consumer. The CC appears to have taken the view, after considering the arguments of Provident, that Provident is not currently acting as required, and has provided some useful guidance on how far it believes the current split differs from what it appears to believe is appropriate.

I see little prospect of Provident avoiding court action over this, or the threat of it followed by settlement, since I'm sure that consumer action groups will offer to fund court action for consumers who can't afford to take the risk themselves. I also see little prospect of Provident winning in a "Provident v. CC with consumer as innocent victim" fight accompanied by local adverse PR from consumer groups.

It's up to Provident to decide how to retain its profit margins while making the changes which appear to be unavoidable, aside from the potential to look like bad guys fighting it instead of accepting the inevitable early and with grace (and maybe a business grimace:)). Would be nice to look better than the banks do, with their opposition and closing of accounts and such. Some interesting PR potential there, with a "vilified" doorstep lender showing the sort of leadership that the mainstream banks aren't showing with charges.

Cumbrian_Male wrote:

We are based on transparency and fixed cost. No additional interest or bounced cheque charges.

And that's just what's needed for this market: transparency and certainty, unlike the unpredictable high cost of bank charges.

Cumbrian_Male wrote:

Yes the reporting of account history to CRA's could well become a way for those who have a poor credit history to repair their rating and demonstrate financial stability.

It will probably lead to a lose of customers but if it means that Home Credit isn't villified as it is now then it can only be a good thing. It will mean we have to keep improving our selection and risk assessment techniques as more of the profitable customers move up to mainstream lenders, or that the costs of borrowing at this end of the market increases.

The next few years will interesting for the home credit market.

Definitely challenges here, including the likely loss of some of the more reliable customers.

Personally I'd love to see Provident promptly taking the high road and announcing a response within the next week or two. Perhaps giving consumers 3/4 of what the CC suggests for early repayment, eliminating the need to fight for it yet still retaining some of that margin. The CC ruling seems to be a useful tool to help with acceptance among the agents and I hope that the better ones will like to be seen to be doing the right thing.

I'd say that's the way for Provident to go if it wants to be the leader in the business and be doorstep lender of first choice in the coming increased competition. Trust that Provident is offering a reasonable and trustworthy deal could beat the unknowns of competing vendors with lower rates and unknown possible catches...

What is good for Provident is that the CC did not regulate rates and implicitly accepted the high interest rate reward for risk in this business. That's excellent long-term news for the future existence of the business, even if there are some short term challenges.

jamesd

Cumbrian_Male wrote:

Without going into too much detail, an agents commission rate reflects the quality of their agency. The more customers who go into arrears the lower the rate of commission, this is to punish agents who over commit their customers.

Good to hear about that penalty for over-committing. It's an interesting in-built ethics regulator (well, really profit, but that's not as good for PR as calling it ethics:))...

Cumbrian_Male wrote:

For bulk payments of anything over 5x weekly rate they get half the standard commission rate. 5x to allow for monthly paid accounts.

However there isn't any distinction between a bulk payment being a genuine early settlement, or generated through refinance.

Then I think that Provident has eliminated it's own defensive argument, since it's apparently paid regardless of risk and cost factors for that customer.

Cumbrian_Male wrote:

So there is a differential as they receive half what they would have if they collected it to term.

From a company point of view a settled account is a lost source of revenue, and a higher cost associated with recruiting another customer of unknown risk.

So in your view we should pay more to agents who eliminate the default risk by removing the income source, than the one who retains it?

They get that difference faster, so there's clear reward there even if the payment is lower and this loan is really ended. I assume that Provident has studied the effect of customers thinking they are clearly getting a good early repayment deal on their willingness to borrow again? I wonder how many are repeat customers and not really lost at all, just providing some revenue lump sum until next time.

For refinance business, the agent and Provident obtain higher revenue from the presumably higher or longer term renewal, so that clearly has its own reward, in retained and now known-reliability business. This clearly provides its own reward - as you in effect noted, the revenue source is not being lost in this case. This appears to substantially reduce the need for a payment to the agent - who wouldn't be glad of profit continuing for longer from a lower risk customer?

For these reasons, I think Providents rebate levels for refinance business are clearly indefensible if challenged, even more so than the CC found for the case where the business really does end. Or, Provident has to argue that these costs are simply the cost of processing the end of the loan. But you didn't argue that, but instead argued revenue loss, which pretty much defeats Providents argument that the money really is just costs.

Assuming for the moment that Provident does argue that it's just cost. How much of the cost is the ending of the old loan and how much the setting up of the new... and again it appears that for refinance business much of it is really cost of new loan, which will be recovered with revenue from that new loan, not cost of ending old.

There is new customer risk, but that's growing the market and no business can avoid that risk if it wants a future.

We can measure the value Provident places on customers with known payment records easily enough: what incentives, reflecting their lower risk in lower cost or increased functionality of some sort, does Provident offer to them to encourage them to borrow again? If the answer is none, then Provident has defeated your argument about revenue and known-reliable customers by not acting as though it is true.

Of course, your argument is true... but no incentive would mean no perceived value to Provident or no competition or something else to account for the lack of incentive to get a more valuable customer back.

Cumbrian_Male

How the company responds is totally without my influence, I'm just a minion in the field.

I suspect that there will be nothing of a fanfare and they will change the rebates again to reflect the suggested middle ground at the latest possible opportunity, the way is already paved for regular statements, and there was a recent minor tweak to the commission structure. If profits are threatened then a tightening of selection criteria and some further redundancies, will remove some costs to keep the shareholders happy.

Can't speak for all the employees but the majority do care and have the customers interests to heart. It's hard for some customers to accept when they are declined further lending at this time of year.

It's been good to have a reasoned discussion without any Provi bashing which is unfortunately the norm.

Cumbrian_Male

jamesd wrote:

For refinance business, the agent and Provident obtain higher revenue from the presumably higher or longer term renewal, so that clearly has its own reward, in retained and now known-reliability business. This clearly provides its own reward - as you in effect noted, the revenue source is not being lost in this case. This appears to substantially reduce the need for a payment to the agent - who wouldn't be glad of profit continuing for longer from a lower risk customer?

I agree the merit of your arguement here, for true early settlement then I believe the agent should be paid commission, however in a refinance deal the settlement figure is effectively our own money from the new loan to repay the old loan. Why do the agents get paid on this? I assume it is to reinforce the self employed status only, ie commission based on gross collections. I can't see any other business reason to pay them it. Personally I would prefer them to not receive any commission on a refinance deal as it would promote responcible lending.

jamesd wrote:

We can measure the value Provident places on customers with known payment records easily enough: what incentives, reflecting their lower risk in lower cost or increased functionality of some sort, does Provident offer to them to encourage them to borrow again? If the answer is none, then Provident has defeated your argument about revenue and known-reliable customers by not acting as though it is true.

Of course, your argument is true... but no incentive would mean no perceived value to Provident or no competition or something else to account for the lack of incentive to get a more valuable customer back.

All I can say is that for certain customers with the better risk rating there is a retention program in place with various offers to maintain their business.